NOTES

ECONOMICS: Chapters 1,2,19

I. What is economics?

a. economics

b. allocation of limited resources-

c. resources -

.

d. wants -

II. Why is it important?

a.

b.

c.

III. Two Levels of Economics study:

  1. macroeconomics -
  2. microeconomics -

IV. HANDY DANDY GUIDE TO ECONOMICS

  1. PEOPLE ECONOMIZE –
  1. ALL CHOICES INVOLVE COST –
  1. PEOPLE RESPOND TO INCENTIVES –
  1. ECONOMIC SYSTEMS INFLUENCE INDIVIDUAL CHOICES AND INCENTIVES –
  1. VOLUNTARY TRADE CREATES WEALTH –
  1. THE CONSEQUENCES OF CHOICES LIE IN THE FUTURE -

V. Economists make several assumptions about individuals:

  1. motivated by self interest; respond predictably to opportunities for gain
  2. individuals will act rationally

VI. WHAT DO ECONOMISTS DO?

A.

B.

C.

VII. HOW DO They DO THIS?

  1. Gather empirical data relevant to a specific economic problem. This is called descriptive or empirical economics.
  2. formulate principles, or generalize about the way individuals and institutions behave in situations. This is called economic theory.

generalization - a logical conclusion reached through consideration of a series of facts.

ex. More ice cream is sold in July in Alabama than in any other month of the year.

The average daily temperature for Alabama in July is 89 degrees.

What generalization can be made here?

WHEN FORMING GENERALIZATIONS, ECONOMISTS ASSUME ALL OTHER

FACTORS BESIDES THE ONES BEING CONSIDERED TO BE EQUAL.

Ceteris Paribus Assumption:

Economists assume that all other variables except those under consideration are held

constant except those under immediate consideration.

  1. Economics is unlike natural sciences

The economic principles formed by economists are abstractions or simplifications which omit irrelevant facts and circumstances. These models do not mirror the complexity of the real world, but it is not necessary for them to do so. We can still gain beneficial information from economic principles without including all the real world variables.

e. THE FINAL STEP IN THE PROCESS IS THE FORMATION OF POLICY

TWO TYPES OF POLICY DECISIONS:

1. positive economics –

2. normative economics -

VIII. ECONOMIC GOALS – all governments have goals that they hope to reach for their people.

These goals are value judgements that are accepted as what our economic situation as a nation should be.

  1. economic growth –
  1. full employment -

3. economic efficiency -

4. price level stability -

  1. economic freedom -
  1. equitable distribution of income –

7. economic security -

  1. balance of trade –

WHICH OF THESE ARE COMPLEMENTARY AND WHICH ARE IN CONFLICT WITH ONE ANOTHER??

WE AS A NATION HAVE TO PRIORITIZE OUR GOALS. OUR PRIORITIES CHANGE OVER TIME.

  1. Resource Types or Categories
  1. Land –
  1. renewable resources–
  1. nonrenewable resources –
  1. Labor –
  1. Capital –
  1. physical capital –
  1. financial capital –
  1. human capital -
  1. Entrepreneurial ability –

Four functions of entrepreneurs:

  1. Money Income paid for the use of these resources is in the form of:
  1. Production Possibilities Frontiers/Curves
  1. production possibilities –
  1. Production possibilities curve – a visual representation of opportunity costs of producing one good instead of another. It illustrates the amount of product foregone to increase output of any given product
  2. Assumptions when working with production possibilities tables

THE DECISION OF WHICH COMBINATION OF THE PRODUCTION MIX TO USE IS A NORMATIVE ECONOMIC DECISION.

  1. Law of Increasing Opportunity Costs – is reflected in the shape of the production possibilities curve (PPC). The slope of the PPC becomes steeper as we move from point a to point e. This indicates that to get increasing amounts of one good, more of the other must be sacrificed.

The PPC curve looks like this:

On one axis is the production of one product, ex. oil

On the other axis is the other product: the environment

You cannot have more of one without giving up more of the other.

Preserving the

Environment

0oil production

Each point along the curve represents maximum output or full production. In reality we do not generally have full production and full employment. The PPC is a visual representation of opportunity cost.

opportunity cost –

What will happen if we remove the first three of our previously mentioned assumptions?

Ans. – in the case of unemployment or underemployment problems, the point

representing your level of production will lie inside the PPC.

This illustrates the economy is falling short of the goal of full employment and

production.

There are only a few changes that will shift the curve outward.

These are:

a.

b.

c.

d.

  1. Guns vs. Butter

During the Great Depression we were producing below capacity (point A) in our factories because no one had the money to buy the goods and services we produced. Therefore the PPC could have been represented by Point A below.

.C

Guns B

A.

0 consumer goods (butter)

When WWII began, we went from little production with a limited workforce to full production with an expanded workforce which included those old enough to retire and women who had previously worked only in the home.

The PPC appeared at first to move to full production (point B) and then surpassed full production as illustrated by shifting from point B to point C on the new curve. Point C represents the new full production curve.

PRESENT VS. FUTURE POSSIBLITIES

A company’s current choice of output mix will have an effect on the future location of the PPC.

This is important because investment in capital goods will create more economic growth in the future.

By investing in things that cause growth to rise for example increasing the reserves of resources, increasing the quality of the resources, increasing and improving technology, the company’s future growth can be very positive. This decision may mean a trade-off of current profits for future ones that will be greater.

e.g. school investment in technology – very costly investment but the future rewards are much greater than the original costs.

American companies have been accused in the past of chasing current profits at the expense of future growth and productivity.

  1. The Types of Economic Systems
  1. World societies select the type of economic system that best meets their political goals and

economic needs. All economic systems answer three basic economic questions in dealing

with scarcity; what to produce, how, and for whom to produce. These systems

tend to differ as to:

  1. who owns the factors of production
  2. the method used to coordinate and direct economic activity (how goods and services are produced and who receives them)
  1. There are three types of economic systems:
  1. traditional
  2. command
  3. market
  1. The Traditional System

Traditional systems base economic decisions on what has been done in the past. Habits, customs, and culture play major roles in deciding on production methods, exchange of goods, and distribution of income. Heredity and caste dictate the role of individuals and changes in socioeconomic status are rare.

  1. Characteristics of the system:

2.

3.

4.

5.

6.

  1. Factors that cause change in traditional systems:

2.

3.

  1. Examples of traditional systems: tribal cultures including those in some areas of South America and in recent past the Native Americans among others.
  1. The Command System

The Command economy is one in which the government makes all major economic decisions and owns all property resources.

  1. Characteristics of the command economy:

1.

2.

3.

  1. examples of command systems: China, Cuba, Iraq (to some extent) Their political systems are usually dictatorships or communistic.
  1. The Market System

In the market system resources are privately owned and economic decisions are made by individuals who own the productive resources.

  1. Characteristics of the market system:

1.

2.

3.

4.

5.

  1. apparent advantages: promotes efficient use of resources, stability of output and

employment, and rapid economic growth. There is little need for government

control or intervention. Government’s role is limited to protecting private property

and establishing an environment appropriate for the operation of the market

system.

c. examples of market systems: U.S., Japan

  1. The Mixed Systems

Most of the world’s economic systems fall into the category of mixed systems. These are distributed along a line between the command economy and pure capitalism (the market economy).

  1. The United States leans toward the purely capitalist system but does have some

examples of command type government related activities.

e.g. regulatory agencies, TVA, price subsidies, price ceilings and floors

  1. The countries of the old Soviet Union and China most closely resemble the command economy but also have some capitalist tendencies. New reforms in both regions have moved them closer to private ownership of resources and capital.
  2. There are some economies which have not followed the traditional mix of government control and market involvement. Nazi Germany was an authoritarian capitalist country- high degree of government and direction but property was privately owned.
  3. Yugoslavia prior to its recent problems was a market socialist country and China today is one - extensive government ownership of natural resources and capital with considerable reliance on free markets to organize and coordinate some parts of economic activity. Sweden is also market socialist.